The Case of the Mysterious Wendy's Bond Issuance

Barron’s devoted quite a bit of space to an update on the combined Wendy’s/ Arby’s merger that Nelson Peltz and his Trian investment vehicle put together last year. They didn’t manage to explain the mysterious bond offering from Wendy’s (WEN) but I will attempt to add some dimension to that story here.

The big question on everyone’s mind now is why Wendy’s just floated $565 million in new bonds recently.

From Barron’s: The $565 million bond offering, however, is a bone of contention. Out of the proceeds, Wendy’s/Arby’s will use $132.5 million to repay some of its bank debt. As for the remainder, it has said only that the money will be used for general corporate purposes, meaning anything from working capital to acquisitions to dividends and buybacks. Some investors fret that the new company didn’t need the money…so Howard Penney, an analyst at Research Edge, calls the bond deal a “head-scratcher.”

I’ve read explanations from a slew of analysts and they mostly site the same justifications for the half a billion dollar debt offering, including the potential for a big one-time dividend (which Peltz denies will happen), the need for working capital for building and maintaining new restaurants (which was vexing to Barclay’s analysts in their last report in which they called the US markets too mature) as well as the potential for a stock buyback.

There is also, of course, the possibility that all of these traditional explanations have missed the mark. It is possible that the analysts quoted in the article and elsewhere are underestimating Peltz’s ambition and creativity.

Let’s do a bit of connecting the dots and see if there’s a more interesting explanation for what Peltz and his beefed-up flagship company Wendy’s could be up to.

Peltz and his Trian hedge fund have been lowering or eliminating stakes in many of their high profile companies lately, including KrispyKreme Doughnuts, Dr Pepper Snapple Group, Kraft Foods and CKE Restaurants (Carl’s Jr and Hardees) . While this lightening up takes place in the hedge fund’s portfolio, Peltz has given indications that he is more interested in finance-related investments. Recent rumors about Peltz taking an interest in Legg Mason made serious waves in the market, for example, while Bloomberg has listed Peltz among several big shots who were raising public money to make mortgage investments earlier in June.

So if the Trian vehicle is going to be focusing more on finance or mortgages, isn’t it possible that Nelson Peltz still wants to keep the door open to scratch his restaurant itch? Would it be totally out of the question to posit that Peltz wants to make sure that his billion-dollar burger and roast beef empire is liquid to move on an undervalued investment in restaurant land even if Peltz’s other investment capital is tied up elsewhere?

This wouldn’t be the first time Peltz has used a public vehicle as a war chest to make restaurant deals. In fact, the entire existence of Triarc, the previous public incarnation of Arby’s, was treated as exactly that.

I remember talking to an analyst about the valuation gaps between Arby’s Triarc holding company and, say, McDonald’s or Burger King. The guy looked at me like I had three heads, before saying “The only way one would believe that they could analyze Arby’s would be to believe that they were able to read Peltz’s mind!”

And what of Peltz’s restaurant itch? Well, without embarking on a drawn-out history lesson, I’ll just say that Nelson Peltz and Trian have flirted with or influenced more food companies than I have room to print here. A few examples on the food side would be Kraft, Heinz, Snapple and Cadbury. As far as restaurants, Peltz has been involved with everyone from Cheesecake Factory to PF Changs to Krispy Kreme to Wendy’s.

With this much apparent interest in the sector, I’d be hard-pressed to believe that he wouldn’t want to have the flexibility to do a deal if the right one came along; Wendy’s new cash hoard puts him in exactly that position, albeit indirectly.

The bottom line is that Nelson Peltz, perhaps the most prolific and successful food and restaurant shareholder activist of all time, may have trimmed his exposure in this sector, but he’s likely only easing off the trigger as opposed to removing the ammo from the gun. His claim that the Wendy’s capital raise was done because “Our philosophy is that when money is available, you take it” may be a tad disingenuous.

He’s taking this capital at a 10% vig in the midst of a credit crunch, so I hope that the cash isn’t truly going into a mason jar in the backyard for a rainy day. Peltz seems too smart for that and so if I were the CEO of a down-on-it’s-luck restaurant brand, I’d stay vigilant.

* Yes, the artwork is mine, although I will accept bids for the original print (crayons on construction paper). Full Disclosure: I currently manage accounts that are long WEN, DPS, BKC and MCD. My commentary above is strictly a discussion of publicly available information and is not an invitation to buy or sell securities. Do not trade based on anything you read here, please see my Terms & Conditions page for a full disclaimer.